Berkshire Hathaway (BRK.A -6.74%) (BRK.B -6.89%) is a troublesome firm to know. There’s nothing in regards to the particular person companies inside the conglomerate that is all that troublesome to wrap one’s head round. The issue is that there are such a lot of totally different enterprise strains underneath the Berkshire umbrella. That mentioned, the corporate’s most necessary enterprise had an important yr in 2024. However do not get used to it.
What does Berkshire Hathaway do?
As famous, Berkshire Hathaway is a conglomerate. So it does not simply do one factor, it does many issues. Normally conglomerates have a couple of associated companies underneath one company umbrella. Berkshire Hathaway’s portfolio is massively numerous. It consists of electrical utilities, trains, power pipelines, paint, house constructing, numerous retail institutions, numerous producers, and insurance coverage. That is not even an exhaustive record.
Picture supply: The Motley Idiot.
The explanation for the eclectic portfolio of companies is Warren Buffett, the corporate’s CEO. At his core, he’s a inventory investor, skilled by Wall Road icons like Benjamin Graham. This drastically modifications the way in which he appears to be like at constructing Berkshire Hathaway and turns it into one thing extra like a mutual fund than a standard firm. Whenever you purchase Berkshire Hathaway, you are actually simply investing alongside Buffett and his staff.
Warren Buffett’s funding strategy is to, roughly talking, purchase when good corporations are attractively priced after which maintain them “perpetually.” This permits Buffett and his shareholders to learn from the expansion of the companies over time. Given the long-term nature of his mannequin, it makes full sense that Buffett would purchase complete companies. The inspiration of his funding strategy, nevertheless, is the insurance coverage enterprise.
Buffett is placing the float to work
Insurance coverage corporations absorb cash within the type of premiums and solely pay out cash at a later date when one thing “unhealthy” occurs, triggering a fee. For instance, the Geico enterprise collects cash up entrance, however solely pays out if one among its insured drivers will get into an accident. That is the place issues get fascinating for insurance coverage corporations, as a result of they’ll make investments that money whereas they’re ready for a declare. Buffett makes use of the float, as that money known as, to assist the bigger firm’s funding strategy.
In Buffett’s 2024 annual shareholder letter, he defined: “In 2024, Berkshire did higher than I anticipated although 53% of our 189 working companies reported a decline in earnings.” But the corporate nonetheless managed to have a reasonably good yr, with working earnings rising from $37.35 billion in 2023 to $47.44 billion in 2024.
That final result was made doable by a fabric uptick in Berkshire Hathaway’s insurance coverage enterprise. The corporate’s insurance-underwriting working earnings rose from $5.4 billion in 2023 to $9 billion in 2024. The insurance-investment earnings jumped from about $9.6 billion to almost $13.7 billion. There have been places and takes all through the remainder of the enterprise, however these had been the massive good points that drove the corporate’s efficiency.
The issue with that is that the outcomes from insurance-underwriting and insurance-investment earnings can change dramatically from yr to yr. Typically the numbers go the “incorrect approach.” For instance, in 2022, insurance-underwriting misplaced $30 million. Years with massive claims will be like that. And in 2021, this enterprise line solely produced $728 million in working earnings. Insurance coverage-investment earnings tends to be a bit extra steady, but it surely, too, can differ by billions of {dollars} a yr relying on what is occurring on Wall Road and inside the economic system. In 2021, this line merchandise generated $4.8 billion in working earnings and $6.5 billion the very subsequent yr.
Berkshire Hathaway’s monetary outcomes are exhausting to foretell
So, in some methods, Berkshire Hathaway had an excellent yr in 2024. However given the affect of the insurance coverage enterprise, buyers should not get used to that — it may change rapidly. Add in the truth that greater than half of the working companies underneath the Berkshire umbrella noticed a downturn of their outcomes, and possibly 2024 wasn’t pretty much as good a yr because it first appeared.
This is not meant to be a knock on Berkshire Hathaway or Warren Buffett. The CEO has clearly created an organization that has rewarded buyers effectively for proudly owning it. Nevertheless, it highlights the truth that Berkshire Hathaway is not your typical firm. It additionally factors out that most individuals shopping for it ought to view proudly owning Berkshire as extra like proudly owning a mutual fund than a enterprise.
